How Hoarding Toilet Paper Leads to Plunging Mortgage Rates
(Or why there’s not enough hand sanitizer to save the economy.)
I run Compound, a real estate and financial services technology company based in New York City, and today, I have front row seats to a citywide coronavirus-induced shutdown. The last time I saw the city so quiet was after 9–11.
The reaction to this threat of pandemic has been drastic. New York City’s public schools (the largest public school system in the country) have been closed until April 20th. Restaurants, bars and theaters have been directed to close. Tourists have vacated the city, airports are empty, and there is even talk of airlines shutting down entirely. Some of the largest financial institutions in the country have closed their NYC headquarters. The Dow Jones Industrial Average continues its pattern of volatility, with 5 to 10% swings starting to seem like the “new normal.”
During my professional career, I have witnessed three major downturns of this magnitude:
- In 1999, the stock market correction due to the internet bubble collapse
- In 2001, after the 9–11 terror attacks
- In 2008–2009, during the great financial crisis
After each of those downturns, I watched shrewd investors build vast personal fortunes by behaving rationally while others panicked. I even watched some companies emerge stronger on the other side. I intend to navigate Compound toward a similar result during this downturn.
As principals of Sequoia Capital wrote this past week, “many of the most iconic companies were forged and shaped during difficult times.” That is why, despite the uncertainty, I see a tremendous opportunity for Compound.
Compound is well-positioned for these emerging economic conditions for the following reasons:
- Our product is almost entirely virtual.
- We are not dependent upon tourism or transportation, the industries which appear will be impacted the most.
- When compared to the stock market’s volatility, residential real estate investment appears to be a very safe and logical investment alternative. Even in times of extreme uncertainty, everybody needs somewhere to live.
- With most white-collar jobs becoming “work from home” and workloads slowing, more people will have time for personal investing.
At Compound, our top priority is protecting our investors’ capital and providing greater access to quality real estate investments. We are watching the markets carefully for opportunities to acquire real estate and related assets at discounted prices in locations that we believe will exhibit resiliency. This is the same tactic utilized by private equity firms after the 2008/2009 financial crisis when they amassed enormous real estate portfolios at deeply discounted prices. While these price adjustments have not yet taken effect, we believe that attractive opportunities will present themselves in the near term. This crisis may present a once-in-a-lifetime opportunity for deep value investing in real estate.
There are a few other macro-trends worth noting:
- 30-year mortgage rates are at all-time lows. Low interest rates typically result in increasing home prices.
- Cancelling plans and trips will result in pent up demand, which could result in a “v-shaped” recovery, as predicted by Barry Sternlicht and others.
One thing is certain: recovery is inevitable. Humanity will not remain in this funereal state for very long. In the end, humans are ingenious and upbeat. They will find a way to prevail. In fact, we’re betting on it.
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Compound Asset Management, Inc. is a financial services and technology company and qualified opportunity zone business based in New York City. Compound is reimagining how the world invests in real estate using technology. Compound is led by an executive team with deep real estate, finance and technology experience.
